The Missing Link: Financial Health

Production perspective:

The main objective of crop and dairy consultants is to improve plant or animal performance by optimizing quantity and quality. Research has focused on products and management strategies to meet production benchmarks. The consultant’s focus has been to keep crops and cows healthy, so performance is improved or maintained. The financial aspect has generally been geared toward accounting and preparing taxes. The missing link is the financial health or profitability of the operation. In today’s volatile markets, an operation may have the best production metrics, but if the financials are broken, any attempt to make production improvements may not result in financial progress.

The Extension dairy business management team has summarized production and financial results from farms participating in the crops to cow project. Twenty-five dairies provided their financial data so a FINPACK® analysis could be completed for 2016 and 2017. One of the goals of the project was to determine any production commonalities that may occur in the high profit group versus the low. Herds within the high profit group had a positive net return for the two years, the medium profit group had at least one

year of positive returns and the low group always had a negative return. All three profit groups met the benchmarks for dry matter intake efficiency, pregnancy rate, days in milk, age at first calving, milk production and components. The common theme was the low profit group had severely compromised financial health and there was no management change that could realistically make them profitable.

On the surface all the farms were very well managed when using production benchmarks as the barometer. Delving deeper into the low profit herds, each farm was evaluated using their current cow numbers and all expenses for the dairy enterprise. Using a milk price range of $17.50 to $18.50/cwt, the average annual milk production was calculated to meet their breakeven cost of production at a minimum. All the herds required eight to twelve additional pounds of milk on average to cover their current expenses. Herds averaging 70 pounds of milk needed to make 78 to 82 pounds annually to breakeven. One herd averaging 76 pounds needed to make 88 pounds of milk to breakeven. Increasing milk production to these levels without incurring additional expenses is not realistic or achievable.

The medium profit group contains the producers with potential to move into the high profit group. Their financial situation is still manageable and from a production standpoint, two to four additional pounds of milk will move them into a positive cash flow. Some management practices related to the cropping enterprise to improve forage quality or quantity could be tweaked to help improve efficiency. Consultants could have a significant impact on helping this group be sustainable.

The high profit group is consistently doing an excellent job managing their finances in addition to their crop and dairy enterprise. They are generating the income needed to cover their expenses and/or they are managing their expenses, so they are in line with the income. These operations are showing positive returns even during these challenging times of tight margins.

Today’s economic environment requires a different approach. Dairy operations are doing a good job of meeting the ideal production goals. However, the industry has been less engaged to provide the same focus and emphasis on finance. Consultants will have the greatest impact on helping the medium profit herds. Knowing a herd’s financial numbers is a mandatory requirement if there is any chance of helping the dairy industry survive.

Action plan for determining if an operation is profitable.

Goal – Compile financial data for at least two years and examine the operation’s financial health.

Step 1: Complete a beginning and ending balance sheet along with an income statement.

Step 2: Work with the appropriate advisor to ensure all inventories, loans, and lines of credit are accounted for properly.

Step 3: Determine the operations net return over labor and management in addition to other financial ratios.

Step 4: Examine the problem areas on the farm – financial, crops, and/or cows to develop a plan to make improvements.

Step 5: Complete a balance sheet and income statement each year so the business’s performance can be evaluated on a historical basis.

Economic perspective:

Monitoring must include an economic component to determine if a management strategy is working or not. For the lactating cows, income over feed costs is a good way to check that feed costs are in line for the level of milk production. Starting with July 2014’s milk price, income over feed costs was calculated using average intake and production for the last six years from the Penn State dairy herd. The ration contained 63% forage consisting of corn silage, haylage and hay. The concentrate portion included corn grain, candy meal, sugar, canola meal, roasted soybeans, Optigen and a mineral vitamin mix. All market prices were used.

Also included are the feed costs for dry cows, springing heifers, pregnant heifers and growing heifers. The rations reflect what has been fed to these animal groups at the Penn State dairy herd. All market prices were used.

Note: July’s Penn State milk price: $18.66/cwt; feed cost/cow: $5.98; average milk production: 81 lbs.

Feed cost/non-lactating animal/day.